Contributing to a DC pension plan

When you join a defined contributionContribution Money that you put into a savings or investment plan.+ read full definition (DC) plan, your employer will set up a plan accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition for you. Contribution formulas for DC plans vary. But they are generally made up of the following 4 elements:

  1. Employer-required contributions – Your employer contributes a set amount each pay period, typically based on a percentage of your pay.
  2. Employee-required contributions – Some plans require you to contribute as well, based on a percentage of your pay.
  3. Employee voluntary contributions – Most plans allow you to contribute additional amounts on a voluntary basis.
  4. Employer matching contributions – Some plans encourage you to save more by “matching” some or all of your voluntary contributions.
Entitlement to employer contributions

Some plans require you to be a plan member for a certain length of time before you are entitled to benefits related to your employer’s contributions (and related investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition earningsEarnings For companies, it’s the money they make and share with their shareholders. For investors, it’s the money they make from their investments.+ read full definition). This is called “vesting” and the length of time varies by province. If you leave the plan before you are vested, you will always get your own contributions back, plus or minus your investment earnings. In Ontario, vesting is immediate, so you are always entitled to benefits related to your employer’s contributions.

3 key points

  1. Contributions are deducted directly from your pay
  2. Your contributions are taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition-deductible to you
  3. Your employer may “match” some or all of your contributions
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